Quantifying the Economic Impact of the Internet

Businesses around the advertising-supported Internet have incredible multiplier effects throughout the economy and society. Professor John Quelch starts to put some numbers on the impact.

by John Quelch

Older Internet users may remember the battles over the commercialization of the Web in the early 1990s, when the first Mosaic browser was introduced. Back then, pioneering adopters passionately condemned the first Web advertisers and tried to bring down their sites with "flaming" attacks. The fight was lost as consumers voted for free information supported by advertising over subscription services.

Ironically, online advertising and the commercialization of the Web achieved important goals of the resisters: to preserve the Web as a medium for free publishing and communications. A recent TNS study reported the leading activities of Internet users as: used a search engine to find information (81 percent); looked up the news (76 percent); used online banking (74 percent); looked up the weather (65 percent); researched a product or service before buying it (63 percent); visited a brand or product Website (61 percent); paid bills (56 percent); watched a video clip (51 percent); used a price comparison site (50 percent); listened to an audio clip (44 percent ).

“Social networks and the easy connections they facilitate are transforming social life and have helped to elect a President.”

All of these activities either are subsidized by advertisers, or take the place of traditional advertising, information search, and purchasing and banking transactions. Free access to information entertainment, along with speedier and more convenient transactions, are a great deal for consumers. Social networks and the easy connections they facilitate are transforming social life and have helped to elect a President. They also increase productivity in the larger economy.

How can we quantify the economic impact of the Internet? A recent study we prepared with Hamilton Consultants for the Interactive Advertising Bureau uses three methods to value the contribution of the advertising-supported Internet to the U.S. economy:

Employment value. The Internet employs 1.2 million people directly to conduct advertising and commerce, build and maintain the infrastructure, and facilitate its use. Each Internet job supports approximately 1.54 additional jobs elsewhere in the economy, for a total of 3.05 million, or roughly 2 percent, of employed Americans. The dollar value of their wages is about $300 billion, or around 2 percent of U.S. GDP.

Payments value. The direct economic value the Internet provides to the rest of the U.S. economy is estimated at $175 billion. It comprises $20 billion of advertising services, $85 billion of retail transactions (net of cost of goods), and $70 billion of direct payments to Internet service providers. In addition, the Internet indirectly generates economic activity that takes place elsewhere in the economy. Using the same multiplier as for employment, 1.54, then the advertising-supported Internet creates annual value of $444 billion.

Time value. At work and at leisure, about 190 million people in the United States spend, on average, 68 hours a month on the Internet. A conservative valuation of this time is an estimated $680 billion.

The advertising-supported Internet also helps the economy by fostering innovation, entrepreneurship, and productivity, particularly among small businesses that create most new jobs in the U.S. In addition, larger companies in this sector, such as Cisco, Google, or Adobe, have been a haven of relative stability through the current economic downturn and boost the U.S. balance of trade through their global sales.

“The advertising-supported Internet also helps the economy by fostering innovation, entrepreneurship, and productivity.”

Consider also the social benefits of the Internet, harder to quantify but including the power of access to information as well as greater flexibility in balancing work and family obligations through telecommuting. The economic downturn is accelerating consumer interest in social networks and online communities as a source of support. And 19 percent of all U.S. marriages are now the result of bride and groom meeting via the Internet.

When regulators start trying to constrain the Internet, let's be aware of its enormous and ever-increasing economic and social impact. The Internet is an economic powerhouse that drives U.S. competitiveness and productivity.

About the Author

John Quelch is Senior Associate Dean and Lincoln Filene Professor of Business Administration at Harvard Business School.

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